The rise in Tesla’s stock price and the fact the company would be included in the S&P Dow Jones Indices has pushed the price even more. There is much hope for the car company, but is it too much. If you compare the value of Berkshire Hathaway in early December to $542 billion to Telus’s $555 billion.
Cash-rich but slower growing companies such as Berkshire have lost favor to rapidly growing business with disruptive technology and the potential for market dominance.
According to an article by Ian McGugan, when Tesla joins the next index it will be the 6th largest component. What does that mean? Index investing is about 40% of the market and in the long run, index investing is a very good thing to do. The reason why it is good because the index drops the losers and add winners, doing that over time will make the index go higher.
Chistopher Bloomstran, President of Semper Augustus Investments in Colorado questioned how any rational investor can put similar values on Tesla and Berkshire. Berkshire generates more in profit than Telsa’s entire revenue. At last count, Berkshire had $145 billion in cash and cash equivalents.
Telsa has tapped the stock market for $8 billion in new funds. The car maker requires a dollar in new capital to produce a dollar in incremental revenues. Tesla cannot finance its growth. It MUST borrow or sell more shares if it is to grow.
Berkshire trades at less than 16 times the company’s earnings. Tesla goes for 1,200 times profits.
Linking to dividend paying stocks, the ideal is to buy a company similar to Berkshire which generates cash flow and have some index funds on the side. Index funds are a great long term investment because of how they are structured, however with all things moderation or diversification is a good thing. If you want the portfolio to grow an index is worth having, but a company similar to Berkshire can ensure you have no trouble sleeping at night.
There are more questions than answers, till the next time – to raising questions.